One Year On: Hong Kong’s Algo Regulation

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With George Molina, Director of Asian Trading, Franklin Templeton
Short term impact of regulation
Regardless of the transparency Hong Kong’s new regulations may achieve, participants always bear the burden of interpreting and translating it into existing workflows. This process typically resembles a mad dash. The impact to end clients is numerous requests for something similar, but slightly different.
Coming together as an industry and agreeing on a standard approach to defining the requirements made the difference in the implementation and execution of the SFC’s algo rules. Instead of the mad dash, we began a thorough search for a technology solution to facilitate more efficient management of interactions and disclosures.
Longer term impact of SFC’s algo regulation
The impact overall has been positive: there’s a forced awareness to understand your counterparties, and greater transparency created across the industry. We have not seen any slow-down in algos being created but more thought being put into in custom algos for clients. In terms of changes, going back to the transparency comment, we now require all brokers to send order execution trails on our executions and orders and certify this via our Markit system.
Impact on sell-side
Although the regs were focused on due diligence, the rules also spurred the comparison of services, back-up, and training offered by algo providers. In order to streamline the due diligence process, the buy-side worked with Asia Trader Forum and Markit to have a standardised due diligence questionnaire deployed online via the Markit Counterparty Manager platform.
By consolidating the information online in one location, the buy-side was able to make comprehensive comparisons across algo providers that would have been very difficult before. I believe this has built stronger more frequent relationships with our brokers and vice versa from their side. In this industry “Know Your Client” should be a gauge of your success.
Ongoing drive for transparency
A regulatory impetus was clearly needed. The timing of the solution rolled out in Hong Kong between the buy-sides, dealers, and Markit was done in less than a year. In other jurisdictions, where no regulatory driver exists, discussions are ongoing among industry participants around a similar process as a ‘best practice’, but progress is slow.
Without the SFC regulation, one could argue that nothing would have happened to even provide an example of ‘best practice’ for other jurisdictions to follow. At Franklin Templeton we are taking this certification globally and although we have done similar questionnaires with our brokers on both hi-touch and low-touch venues. We believe now that there is a platform we should leverage and expand among all our 13 equity trading desks globally.
This transparency push, as with the dark pool requirements, fits within the theme of regulators requiring greater levels of transparency and due diligence for market participants, both from a client and product perspective. The SFC are certainly ahead in the electronic trading certification space and are prompting buy and sell side firms to think about how they may want to apply similar processes elsewhere in the world as a best practice, irrespective of an active regulation.
Continuing to manually and bilaterally manage the increasing requirements and best practices associated to being ‘ready to transact’ is not sustainable, the industry needs to move towards more standardization, centralization and digitization of common and duplicate workflows.
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